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Some say aye, some nay, and others just don’t know

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The debate over steel futures is creating a ruckus in what is usually a quiet season. Amidst it all, a voice has emerged asking for help in understanding what these contracts really mean for his business.

PITTSBURGH — The future of steel futures remains a hot topic in the global steel industry, with opposing camps both secure in their beliefs—one that futures contracts are necessary and will work to reduce volatility, and the other just as certain that futures are not needed and will not work.

But a third camp is beginning to emerge. Whether or not futures will work is a secondary question; their primary question is whether or not those with steel interests even understand the nuances of the concept in the first place.

Global steel producers for the most part remain opposed to the introduction of steel futures contracts. They say the issue of price volatility is being made moot by rapid industry consolidation and the newfound ability of the remaining steelmakers to manage supply to meet demand.

Lakshmi N. Mittal, president and chief executive officer of ArcelorMittal, the world's largest steel producer, is on record as saying futures are unnecessary and will not work. Beyond the problem of the technical feasibility of futures, Mittal said, lie such issues as physical inventories and what grades of steel might be included in futures contracts. ArcelorMittal is not promoting the idea of futures contracts, he said, but the market ultimately will decide their fate. It is up to steel customers whether or not they think futures will add value for them.

"Futures are essentially a mechanism for financial companies mainly dealing with hedging and futures," Mittal said during a presentation at the Steel Success Strategies XXII conference in New York co-sponsored by AMM and World Steel Dynamics. "It is not a solution for curbing price volatility."

His stance is backed by Daniel R. DiMicco, chairman, president and chief executive officer of Nucor Corp., Charlotte, N.C. DiMicco has said futures would serve only as a hurdle between steel producers and their customers and would not work to reduce price volatility. "In the end, the market decides," he said in a recent interview.

But actions by some add to market confusion. ArcelorMittal, for example, recently applied to become a Category III member of the London Metal Exchange, leading some to question its stance on futures. The LME is set to launch two steel futures contracts in April next year.

ArcelorMittal said its stance has not changed and that its application for membership is related to its nonferrous business. The company does business in a number of nonferrous metals, including copper, tin and zinc.

Martin Abbott, chief executive officer of the LME, said the arguments by steel producers against futures are exactly the same arguments made years ago by aluminum producers when the LME began to put together futures contracts in that metal. Those arguments fell silent as the aluminum futures contracts proved their worth.

Abbott says steel futures contracts are a fact of life. The LME expects to launch its first steel futures contract, on billets, in April. Making the first contracts physically deliverable is an important key since having a delivery point of last resort "adds a colossal amount of transparency."

Besides, steel derivatives have been available in over-the-counter (OTC) trading since Koch Metals Trading Ltd. started offering OTC futures in January 2004. Now, in addition to the LME, the Dubai Gold and Commodities Exchange and the Shanghai Futures Exchange hope to have steel contracts in place by the end of this year, and the New York Mercantile Exchange also wants to launch a contract.

Yet many in the trenches still do not understand the benefit or even whether benefits exist from steel futures. A recent Letter to the Editor by Barry Lauer of Baldor Electric Co. might have put it best when he asked, in part, what advantages hedging or futures might bring, and to whom. He said he and other steel buyers and producers have been left with the impression that someone is going to make a lot of money through the launch of steel futures contracts, "but it ain't going to be us buyers and producers."

Others, such as Jonathan C. Putman of the Birmingham Futures Exchange, disagree. Putman points out that the ability to hedge offers steel users the chance to offer fixed-price contracts to their customers. Steel producers, after all, buoyed by consolidation, no longer are bearing the risk of long-term price agreements with customers since they now have adjustments for cost fluctuations built into supply contracts.

"Utilizing futures for any other reason (than to offer fixed-price contracts to customers) is not hedging, it is simply speculating on the part of the buyer, betting that they can out-guess the market," Putman wrote in response to Lauer. "If your customers don't need their prices tied down, don't play in the futures market."

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